Friday, December 07, 2007
Unintended consequences of the sub-prime "fix"
We had a couple of discussions here last week on plan to freeze some sub-prime adjustable mortgage rates in order to ease the growing foreclosure problem. TH first posted here, and after some commentary had surfaced I posted here.
Now that details of the plan have actually been released, the analysis begins in ernest. For those for a real thirst, read this post from Tanta at Calculated Risk. Tanta is the most knowledgable mortgage blogger I've seen (and you'd be surprised at how many there now are).
In his post Little Hope for Hope Now Alliance, Mish Shedlock also weighs in and points out a rather alarming detail of the plan that, if left standing will have exactly the opposite effect that hoped for with this new policy.
The plan as announced by the president contained his urging of the Senate to allow forgiveness of mortgage debt to be tax deductable:
Frankly, this is the one piece of the proposed plan that I am actually in favor of, even though it ultimately comes back to the tax payer. I'm not sure if there is a way to apply this conditionally, however, and if this actually passes, there will be few incentives for underwater borrowers not to walk away from their homes. "Jingle mail" will become a widely used expression, and the foreclosure pipeline will soar.
In my opinon this is probably necessary to fully deflate the housing bubble (which is one of many reasons I oppose the rate freeze plan), but policy makers are spending a lot of time talking about ways to delay or avoid foreclosures. Removing the taxable status of forgiven debt will create huge incentives for a lot of people to default, rate freeze or no rate freeze.
Now that details of the plan have actually been released, the analysis begins in ernest. For those for a real thirst, read this post from Tanta at Calculated Risk. Tanta is the most knowledgable mortgage blogger I've seen (and you'd be surprised at how many there now are).
In his post Little Hope for Hope Now Alliance, Mish Shedlock also weighs in and points out a rather alarming detail of the plan that, if left standing will have exactly the opposite effect that hoped for with this new policy.
The plan as announced by the president contained his urging of the Senate to allow forgiveness of mortgage debt to be tax deductable:
Second, Congress needs to temporarily reform the tax code to help homeowners refinance during this time of housing market stress. Under current law, if the value of your house declines and your bank forgives a portion of your mortgage, the tax code treats the amount forgiven as taxable income. When you're worried about making your payments, higher taxes are the last thing you need. The House agrees, and recently passed this relief with bipartisan support. Yet the Senate has not responded. This simple reform could help many American homeowners in an hour of need -- and the Senate should pass it as soon as possible.[emphasis added]
Frankly, this is the one piece of the proposed plan that I am actually in favor of, even though it ultimately comes back to the tax payer. I'm not sure if there is a way to apply this conditionally, however, and if this actually passes, there will be few incentives for underwater borrowers not to walk away from their homes. "Jingle mail" will become a widely used expression, and the foreclosure pipeline will soar.
In my opinon this is probably necessary to fully deflate the housing bubble (which is one of many reasons I oppose the rate freeze plan), but policy makers are spending a lot of time talking about ways to delay or avoid foreclosures. Removing the taxable status of forgiven debt will create huge incentives for a lot of people to default, rate freeze or no rate freeze.
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